current account deficit consequences

effect on AD and growth

a current account deficit can reduce AD and economic growth

if a country is importing more goods than it is exporting, this can lead to a reduction in domestic production and employment

e.g the UK has had relatively low growth in exports especially after leaving the EU which has contributed to its relatively low levels of RGDP

effect on structural unemployment

if a country is importing a high level of goods and services this can lead to losses in domestic industries that are competing with those imports

e.g. structural unemployment has been a concern for the UK, where high levels of imports have affected employment in manufacturing industries

effect on the exchange rate and import costs

if a country is importing more than its exporting, this can lead to a weaker exchange rate which can make imports more expensive

e.g. the UK’s significant current account deficit has helped contribute to a weaker exchange rate, especially accompanied by recent concerns over the UK’s political and economic stability

evaluative points

1. the current account deficit could be caused by high levels of consumer incomes

2. the deficit could be financed by a financial account surplus

3. the deficit may not be the most important macroeconomic priority for the country

high levels of consumer income (evaluation)

if a country has a high level of consumer income, this could lead to higher levels of imports which can contribute to the CA deficit

e.g. the US has a high level of consumer spending which has contributed to its deficit

therefore the CA deficit may be a natural consequence of high income economies

financial account surplus (evaluation)

the UK has helped finance its persistent current account deficit via inflows of FDI and portfolio investment

a less important macroeconomic objective

in Japan the government has prioritised economic growth and inflation over reducing the current account deficit which has fluctuated between surpluses and deficits over the past few decades